In March, LAN Systems will change its name to fall in line with global parent, Westcon Group. On a recent visit to Australia, Westcon founder, president and CEO, Tom Dolan, chatted to ARN's BRIAN CORRIGAN about global trends in technology and distribution.
What does the term 'value-added distribution' mean today?
Distribution has a number of functions that you need to be able to do before you can open the doors on a Monday morning: you need to be able to move and deliver boxes, you need to have financial strength, you need to be able to offer credit services, and you need to have vendor agreements in place. Those typical functions are available from all distributors but then there are others that reach forward into the sales cycle and help customers to be more effective in selling product by enabling their sales people, by enabling their marketing and logistics, and by making their most effective people more effective in the field.
A simple way we like to express it, and one that is consistent around the world, is to talk to the owners of value-added resellers (VAR) about their sales force. They might have 10 people with four who are solid performers, but there are another three or four who they haven't decided about yet and a couple who will only be there until they can replace them. Our job is to make the top performers more effective. If we can shorten the sales cycle by a couple of days we have a material impact on their business. The same applies if we can help them add to each solution sale through other factors we bring into play. For the sales people a business owner is undecided about, our services should allow them to figure that out more quickly and get more people into the top performance bracket. It's a constant percolation, so after six months of working with our company a VAR should be able to recognise premium business and revenue they wouldn't have had without being involved with us. If we achieve that we are adding value.
At the other end of the spectrum there's a financial measure; it's all well and good to go to work but this is business and you need to show a financial result. You look at the operating percentage of a distributor to see if it's a broad-line fulfilment or value-added company. Broad-liners are doing 1 per cent operating profit whereas the value players are doing 3-5 per cent.
Some broad-based distributors will also tell you they are solution players. Do you see more 'time and place' companies trying to get into the value market?
It goes both ways. Ingram Micro is a terrific company with world-class logistics and we try to compete so that we can go after some of that end of the business while they put together marketing and solutions to go after our end. But there's intention and there's result. Several years ago it was predicted that Voice over IP would become a reality; and that voice and data would merge. Our reaction was to buy PBX distributors and get full-swing into the voice business so we're now a leader in VOIP. There's a quality of move and a level of resources put to a move that are a measure of whether you will change your company or not.
Value-added distribution is a moving target. What are the new areas of value you can add today?
I was talking to one of our managers recently about how in the 1990s we would worry about what we do becoming commoditised. Time has proved that there's always a new range of products and services you can offer to give you an edge. Today, voice over the network is an application and security becomes extremely important. There are whole new aspects of data storage coming onto the horizon and there's a lot of video collaboration. The greater focus on environmental issues is going to drive corporate and government to implement more video solutions. And mobility will also provide endless opportunities.
What is the biggest challenge to your business?
We are a global company so we work diligently on being entrepreneurial while retaining adequate levels of corporate control. To what extent do things need to be standard or localised? How do you maintain the strong financial controls that produce results while at the same time allowing leadership in the field? That's the balance we look for every day and I think we have done a good job.
LAN Systems has been part of the Westcon Group for several years. Why has it taken so long to change the company's name and what was the rationale for doing it now?
The name LAN itself is a bit dated. In terms of corporate naming you try to pick something that's not descriptive of what you do today because you might evolve and be doing something more sophisticated tomorrow. In the last two years we have had several acquisitions and changed the name more or less immediately. That's because the multinational leverage we bring is much clearer today than it was seven years ago [when purchasing LAN Systems]. At that time we could share an IT system but now there are so many different constructive elements in terms of things like vendor and banking relationships.
Talk to us about some of the other acquisitions you have made in the past couple of years.
TD: We are privileged to have a strong balance sheet and a good income statement that permits an acquisition strategy. In addition, our shareholders are committed to raising whatever capital we need to pursue that strategy. We like to grow profits 5-10 per cent every year through acquisition and in that context we are looking to add customer groups where we think there are efficiencies in our basic system that are going to improve our ability to address that customer group. We like companies that are profitable, that maintain customer relationships, and understand the special sauce of whatever market they are in. When they become part of us we can bring the overall logistics and financial support to make them better in their market.
We are seeing widespread industry consolidation but it has been slower than I had expected, particularly in local distribution. Are you seeing consolidation globally and do you expect to see more of it in this country?
Our belief is that multinational vendors prefer multinational distribution but there aren't enough suitable distributors to meet demand. In fact, there are distributors opening every day. We think that supports our objective to become larger and more multinational because the demand is there. Having said that, some smaller vendors are desperate for representation and the UK probably has 200 distributors. However, if you tier it out by vendors you will see the typical names carry the first and second tier vendors while lots of small companies carry the others. Australia is a unique market because you're so far from the manufacturer and so far from each other. Canada has the same headcount per square mile but they all live in four cities.
What other trends are you seeing in multinational distribution?
There's a much deeper connection with the large vendors; a very keen interest on both sides to make efficient use of assets that are in the channel. There's a lot of consideration into how to deal with currency; you can imagine the problems when you are carrying $300 million of inventory and the value of the dollar falls. Also, so much more globalisation in the SMB market is affecting what our customers ask us to do. It's very common for our customers to be selling to mid-range manufacturing companies that want to have connections with their marketing organisations in another country. Our customers are asked to provide voice service coordination and management across multiple countries and we think that is an opportunity for us to offer significant benefits.
We have seen all the vendors rushing to address the SMB market. Does that have any affect on your business?
It's had great affect for us because if you are shipping to the 10 biggest companies in a city then anybody in the world can open a directory and find those companies. That makes your quality of revenue suspect. If a large portion of your revenue is in SMB across a broad geography then your quality of revenue is much higher. We have increased our SMB exposure by twice our rate of growth for several years and we are quite pleased with that, not only from the point of satisfying our vendors but also the comfort level it gives you in your own business. The channel brings benefit at every level but that benefit is greater when those transactions are more atomised. The further down the pyramid you are, the greater the financial benefit the channel is bringing to that vendor. All the vendors are drinking from the same water fountain. I haven't found it yet but I think it's somewhere in California.
What impact do you think environmental concerns will have on the industry in the next five years?
I expect to see consumer organisations leading the way in trying to establish green credentials. Having a green initiative will be like having a diversity initiative. Technology offers a lot of ways to reduce carbon footprint with working from home, flexi-time and the reduction of business travel. Governments will start embracing these trends; very cool things have been done in the US with the Department of Justice so that instead of transporting prisoners to the courts, audio-visual facilities are installed at the prison.
What is the state of IT recycling in the US? It's pretty shocking here.
I imagine it's pretty shocking in most places. In Europe they've introduced special taxes around the construction of product and all manufacturers are required to develop policies about the retrieval and proper disposal of used product. All of that becomes a fabulous opportunity for the channel because a manufacturer has to account for how much product it shipped into a country and how much it has collected. Manufacturers won't do that; they will use the channel so it becomes a big logistics opportunity.
What other changes can we expect to see in the industry?
At Westcon we try to learn things from the field and replicate them in the company. One of them was a collaborative Web solution used here in Australia so that our marketing and sales people could collaborate with the marketing and sales people within reseller organisations. That was so successful that we are rolling out the infrastructure around the world. I think we will see more initiatives to create a closer working relationship between vendors or distributors and resellers, and perhaps ultimately the users. That brings efficiency and is also more rewarding because people are interested in different things and VoIP nuts like to interact within a community of like-minded people.
VoIP is being consumed by the broader concept of unified communications. How do you see that area of technology playing out?
It's a magnificent battle of titans. Microsoft Communicator products only have a few steps to go before they can handle voice so Cisco turns around and buys WebEx. It's going to be an exciting field for the channel to navigate through but the most important thing is that you can see the day where we are comfortable working wherever we are and don't necessarily need to go into corporate buildings to be productive. With Web-based emails in the past five years there's a lot more freedom to be where you need to be and that whole capability is just going to be leveraged more.
One of the great reseller frustrations is the lack of common standards being adopted. Does it worry you that we will go down that road again with unified communications?
It remains to be seen. There's recognition at a manufacturer level that creating discord in the customer base is not the route to pursue but there will still be discord because that's how competition rolls out. It's great when China does a five-year plan on infrastructure but there are also limitations to that system. If we did a five-year plan on technology protocols with university professors, I'm not sure it would get us there any quicker.